Some trademark applications for registration for use of brand names in the virtual world make a lot more sense at first glance than others. It is not difficult to imagine Nike using its trademark-protected name and swoosh logo on virtual goods in the metaverse – and in fact, imagination is not required since Nike launched Nikeland on Roblox around this time last year, and more recently revealed a larger venture, .Swoosh, which will see it offer up “interactive digital objects, such as virtual shoes or jerseys.” The same is true for Gucci, for example, and virtual uses of its various source-indicating marks, including its “GG” print, as the Italian fashion brand maintains a virtual presence on Roblox, as well. Against this background, the actual use – and the potential for use – of brands’ marks on virtual goods falls somewhat neatly in line with a trajectory that includes expansion from the “real” world into the virtual world – gaming skins and platform-specific assets, included. 

Potentially less immediately obvious are filings for marks like peanut butter brand Jif’s red, blue, and green-striped logo, banana producer Chiquita Brands’s lady with a fruit hat logo, or the “CHUCK E. CHEESE” word mark for use on virtual goods/services, the latter of which prompted at least one Twitter user, trademark attorney Deborah Mortimer, to ponder, “Do we really need a virtual Chuck E Cheese’s in the metaverse? Who craves virtual pizza?” 

More than FOMO 

The sheer number of companies that have lodged trademark applications for use of their often-well-known marks on goods/services that have no actual “purpose” in a virtual environment has “confused many people into thinking that the metaverse will be stupid – just a big billboard,” Scharf Banks Marmor LLC’s Advertising and Intellectual Property Practice head Darren Cahr stated earlier this year. But “many of these brands know exactly what is up,” he says. In fact, “What a lot of brands realize is that the future health of their companies may depend on bridging the gap between ‘real’ product consumption and virtual product consumption by tying them together as soon as possible.” 

Some of the “trademark applications [may have been filed] out of fear or FOMO,” including uncertainty about if/how their “real world” rights will translate to the relatively new medium that is the metaverse (and web3 more broadly), but there is likely more to it than that. The clever companies, Cahr says, understand that while the dystopian reality depicted in Ready Player One is still “years away, something else is coming much sooner.” 

A number of trademark applications for metaverse goods/services
A number of trademark applications for metaverse classes of goods/services

As for what exactly that “something else” might entail between now and when the relevant tech catches up to the point that the metaverse is a sophisticated and enticing experience (as distinct from silly Meta avatars and glitchy Metaverse Fashion Weeks), Cahr suspects that the “metaverse” will function as “a gaming environment and/or a place where highly motivated early adopters hang out,” and a place where virtual goods have a role. “Your avatar is not eating a taco in Decentraland,” he states, but … virtual goods “become a promotional opportunity, meaning that you buy a taco” – in the “real world” – and the restaurant provides you tokens via a metaverse-centric reward program that “enable you to ‘do’ exclusive [brand-related] things online with those tokens.” 

Cahr’s theory – which is, of course, not limited to tacos, and in fact, may be even more easily applied to things like fashion, particularly as brands prove to be eager to connect with consumers in the virtual world – appears to being playing out in a handful of new applications, such as those from cereal manufacturer Post Foods. Among the goods/services listed in the web3-focused filings for its Honey-Comb, Grape-Nuts, Great Grains, and Honey Bunches of Oats brands: The “administration of incentive rewards programs and the offering of special offers and promotions in the metaverse and other virtual environments, which may be redeemed for goods and services available in the metaverse, other virtual environments, and in the real world” (in Class 35). 

Honey-Comb metaverse trademark filing

Are Consumers Interested? 

For these endeavors to take off, the metaverse – which currently exists in the form of gaming platforms – will need to continue to draw consumers in, and at the same time, the success of such ventures will rely on consumers wanting to engage with brands in the virtual world. There is not exactly a firm consensus on the latter front: Some early-ish survey figures are not exactly promising from a consumer interest perspective. This spring, Zipline surveyed 600 people across the U.S. between ages 13-50 to better understand how generational differences influence consumer perception of and participation in virtual retail experiences. One of the most striking takeaways from the retail tech company’s study was that 85 percent of Gen Z respondents reported feeling “indifferent about brands developing a presence in the metaverse.” That follows from a Piper Sandler report early this year, which found that almost half (48 percent) of the 7,100 U.S. teens surveyed said they are either “unsure” or “not interested” in the metaverse. 

On the other hand, if the previously-mentioned ventures by the likes of Nike and Gucci are any indication, consumers are, in fact, very interested in engaging with brands in the virtual world. More than 20 million people reportedly visited the Gucci Garden pop-up on Roblox during the two-week-long virtual event during the spring of 2021. Meanwhile, Nike’s CEO John revealed in March that “a total of 6.7 million players from 224 countries have visited NIKELAND,” the experience that Nike launched with Roblox in mid-November 2021. Since then, the number of NIKELAND “visits” has surpassed 27.2 million, according to Roblox data.  

Given that it is not yet clear how exactly the metaverse will evolve and what brands’ endeavors in it will look like, one of the most telling takeaways from Zipline’s survey is that 85 percent of Gen Z consumers said that they “would be interested in hybrid in-store experiences that use mixed reality technologies to incorporate a virtual element to shopping.” This seems to fit in neatly with the larger narrative that in a post-pandemic world companies need to provide consumers with “an exponentially deeper level of engagement [both] online and offline,” per McKinsey, which requires companies to “put digitally driven commerce at the center of their organizations so they can orchestrate experiences that meet customers’ ever-rising expectations.” These range from “live commerce to the nascent metaverse.” 

THE BOTTOM LINE: If nothing else, the virtual world will likely be part of brands’ efforts to cater to consumers in a more dynamic way, namely, by adopting an omnichannel model, in which the metaverse may be one critical component. And at least some early-moving brands are making inroads in that direction now. 

The crypto crash – which saw Bitcoin slip almost 70 percent from its record high and the value of a number of altcoins also plummet – has revealed that crypto platforms like Coinbase and Crypto.com are not just exchanges, they are more like banks. Except defunct crypto exchanges like Celsius Network and Voyager Digital were only banks if you read the fine print, and most customers, of course, did not. Until very recently, crypto exchanges were all the rage. They had A-list celebrity spokespeoplestadium naming rights, and public endorsements by major politicians. While crypto exchange companies market themselves as platforms for users to buy and sell crypto, they also function like stockbrokers and, more concerningly, their core business models quite closely resemble banking.

Traditional exchanges, like the New York Stock Exchange, rarely go bankrupt, and since they do not offer account services, if they do go bankrupt their clients are not on the hook for any losses. Brokerage firms, like Wealthsimple, do sometimes go bankrupt, but their clients’ portfolios are held in the client’s own name and, accordingly, may simply be transferred to a different broker. In the event of fraud, both Canada and the United States provide automatic insurance for lost assets. 

Meanwhile, banks, such as the Royal Bank of Canada, take on more risks and fail more often. Because banks use customer deposits to make loans, banks are vulnerable to runs, which is why most high-income countries have deposit insurance and regulate banking more than other financial services. And herein lies the problem with crypto exchanges: Companies like Celsius and Voyager marketed themselves as both exchanges and brokers, and so, that is how their apps appeared. But if anyone were to read the terms and conditions, it would be clear that they were actually uninsured, quasi-banks. 

Risks in crypto-banking

For companies like Celsius and Voyager, customers’ accounts were not held separately in their own wallets, but rather held in a pool owned by the platform. The platform would use this pool of money to make loans (often to other crypto firms) or to engage in its own speculative investing (often in crypto assets). When depositors cashed out, they were paid from the pool, which was able to cover normal on-demand withdrawals but did not have enough cash to handle everyone pulling out simultaneously. Sound familiar?

When crypto prices collapsed, these firms’ loans went belly up and some were forced to suspend withdrawals. When Celsius filed for Chapter 11 bankruptcy in July, the Hoboken, New Jersey-based crypto lending company’s depositors learned their accounts were worthless, having been gambled away by the company. These firms deliberately obscured this reality to their clients. In Voyager’s case, the crypto brokerage firm outright lied about being FDIC-insured. Snake-oil salesmen from these companies convinced their customers that regulated banks were the problem, only to learn exactly why those regulations exist in the first place. 

To make matters worse, the lack of transparency in crypto markets makes it quite easy for executives and developers to dump their positions long before they suspend withdrawals. By the time customers realize their money is gone, those responsible have cashed out with a tidy profit. 

The future of decentralized finance

So, where do we go from here? At the micro level, the answers are obvious. Crypto exchanges should be regulated in the same manner as brokers. Client assets must be held separately and securely, with clear rules on risk exposure in the firms’ own trading. At the same time, crypto assets, themselves, should be clearly designated as securities, and therefore, subject to oversight. Exchange platforms should be required to hold sufficient cash in government-issued currency. If this sounds like it violates the ethos of decentralized finance, that is because it should.

The macro level is trickier. Post-2008, we have demonized the big banks and fetishized technology. Crypto enthusiasts claim Wall Street is only in it for itself, and they are right. But they have recreated the same system, only it is even riskier. 

The late arrivals to the crypto party — the ones now holding the bag — are not the wealthy investing classThey are regular people, rightly distrustful of banks and, by extension, our institutions, and are desperately searching for ways to shield themselves from skyrocketing inflation. Rebuilding that trust takes time and energy. It takes a willingness to deal with the inequities caused by a rising cost of living and an extractive financial system. And, crucially, it takes effective regulation. If it looks like a bank and behaves like a bank, it needs to be treated like a bank.

William D. O’Connell is a PhD Candidate in Political Science at the University of Toronto. (This article was initially published by The Conversation.)

Sam Bankman-Fried and a number of big-name FTX “ambassadors” have been named in a second proposed class action lawsuit over their promotion of the now-bankrupt crypto exchange. On the heels of being hit with the class action complaint that Edwin Garrison filed with the U.S. District Court for the Southern District of Florida on November 15, Bankman-Fried, Tom Brady, Gisele Bundchen, Stephen Curry, Shaquille O’Neal, Udonis Haslem, David Ortiz, William Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Larry David, Kevin O’Leary, and the Golden State Warriors are being accused in another Florida-filed lawsuit of engaging in deceptive and unfair trade practices and civil conspiracy. 

Given that Kavrui’s complaint was drafted by the same attorneys as those representing Garrison (namely, Adam Moskowitz and Boies Schiller’s David Boies), the allegations are largely identical to the ones set out by Garrison. In the newly filed complaint, Plaintiff Sunil Kavuri names the same defendants and details the same alleged wrongdoing in helping to promote the offer and sale of unregistered securities by way of FTX, while also failing to disclose “the nature, scope, and amount of compensation they personally received in exchange for the promotion of the deceptive FTX platform.” 

The newer suit does contain a number of claims that depart from those alleged by Garrison, with Kavuri starting off, for instance, by arguing that “there can be no dispute that claims in this case must provide for strict liability, and therefore, if the FTX yield-bearing accounts (“YBAs”) are found to be ‘securities,’ all of the FTX ‘brand ambassadors’ can simply have no defense to the claims in this action.” Kavuri’s also asserts that attempts by the defendants to “push the ‘caveat emptor’ defense in the press, will have no application.” 

Further setting the stage in his complaint, Kavuri argues that this is not a case “where [he] made a ‘risky’ investment in stock or cryptocurrency, or that he lost money speculating on various cryptocurrency projects.” Instead, his claims that his case arises “simply from the purchase of a YBA,” which was “guaranteed to generate returns on his significant holdings in the account, regardless of whether those assets were held as USD, legal tender or cryptocurrency, and regardless of whether any trades were made with the assets held in the YBA.” In other words, the YBA “was portrayed to be like a bank account, something that was ‘very safe’ and ‘protected,’” per Kavuri, who contends that this is “the narrative that the defendants pushed in promoting the offer and sale of the YBAs, which are unregistered securities.” For that, Kuvari asserts that the defendants are “liable for [his] losses, jointly and severally and to the same extent as if they were, themselves, the FTX entities.” 

Just as in Garrison’s case, Kavuri accuses the defendants of violating the Florida Securities and Investor Protection Act, which makes it unlawful to sell or offer to sell unregistered securities, and the Florida Deceptive and Unfair Trade Practices Act, and is seeking an order from the court that the YBAs were securities required to be registered with the U.S. Securities and Exchange Commission and state regulatory authorities, that the “deceptive” FTX Platform “did not work as represented,” and that the defendants were paid “exorbitant sums of money to peddle FTX to the nation.” 

Not Your Average Endorsers

Reflecting on the ability of class action plaintiffs to successfully pursue FTX’s brand endorsers over their appearances in commercials and social media campaigns in order to promote the crypto exchange, at least some lawyers have expressed skepticism. “The plaintiffs are more likely to extract damages from Bankman-Fried than they are from the celebrity endorsers, Darren Heitner, a Florida lawyer who specializes in athletes and technology, told the Washington Post in connection with Garrison’s suit. “I don’t think people signed up to FTX because Tom Brady said ‘I put all my money there’ — in fact he never said that. I would not be terribly surprised if the celebrities prevail on a motion to dismiss.” 

Others are not quite convinced that the celebrity ambassadors have such an easy way out. “The problem these celebrities have is that they went a step further than just appearing in a commercial,” Sherman Silverstein’s Alan Milstein told Sportico, “In the ads, some of them announce that they are excited ‘to partner’ with FTX or to be ‘brand ambassadors’ [for] FTX or to become big-time investors themselves in the firm.” Both Garrison and Kavuri allege “some of the biggest names in sports and entertainment have either invested in FTX or been brand ambassadors for the company,” pointing to Kevin O’Leary, for example, is an FTX shareholder, and linking to an FTX press release that announced Stephen Curry as an FTX ambassador and shareholder in 2021. 

The plaintiffs also allege that Tom Brady, Gisele, Shohei Ohtani, and Naomi Osaka took ownership stakes in the company, seemingly in furtherance of an argument that these are not your average endorsers, and thus, they should be treated accordingly for helping to promote FTX. The failed crypto exchange, which was until recently led by Bankman-Fried, used these stars’ “credibility to try and convince the public the investment was safe,” Milstein said distinguishing the endorsements at play here from the consumer goods-centric ads that brands traditionally enlisted sports stars and other celebrities for. 

FTX’s strategy of pushing famous endorsers-as-part owners is part of a larger trend of companies, particularly startups, enlisting celebrities to promote projects, while also bringing them on-board in advisory and/or investor roles, which diverges from the longstanding practice of celebs simply appearing in ad campaigns and maybe doing some additional promotional work without taking on any additional roles.

Well-known celebrities are actively exercising more leverage when negotiating the terms of the deals they enter into, and as a result, they stand to profit even more handsomely with an equity stake (or in many cases, a profit-sharing agreement) than if they were to simply take the usual endorsement check. Moreover, endorsements that stem from these ownership endeavors tend to be viewed as more authentic in the eyes of consumers, which bodes well for the promoted company and its goods/services, particularly in a market that is saturated with often-undisclosed influencer advertising and diminishing consumer trust.

“Taking on a more active role in a business – or at least appearing to – essentially demonstrates that the celebrity has a stake in the success of that business, beyond the money they would receive for an endorsement,” ThingTesting stated last year. In many cases, this is a win-win for both sides; ThingTesting points to a 2015 deal in which “Beyonce asked Uber to provide equity, rather than cash, in exchange for a performance at a corporate event the company hosted. When the ride-sharing app went public in 2019, she was able to cash out.”

More Litigation to Come

The two lawsuits come as crypto scams are on the rise. In their respective complaints, Garrison and Kavuri cite the Federal Trade Commission’s finding that “cryptocurrency scams have increased more than ten-fold year-over-year with consumers losing more than $80 million since October 2020, due in large part to the use of such celebrity endorsements,” as well as advertising on social media. At the same time, the Securities and Exchange Commission is sending a similar message, with the agency’s Enforcement Division Co-Director Steven Peikin saying this summer that investors “should be skeptical of investment advice posted to social media platforms, and should not make decisions based on celebrity endorsements,” and noting that “social media influencers are often paid promoters, not investment professionals, and the securities they are touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds.”

The rising number of lawsuits centering on the advertising and endorsement of FTX are expected to continue to grow, with Elliott Lam, a Canadian citizen and Hong Kong resident, filing a proposed class-action lawsuit in San Francisco federal court on Sunday on behalf of himself and “thousands, if not millions” of people outside the United States who used FTX’s platform. In the case, the Golden State Warriors is named as a defendant alongside Bankman-Fried, who allegedly leveraged “the international reach” of the NBA team to “outcompete[e] competitor trading platforms and get consumers to use the FTX platform technology instead,” as FTX “need[ed] to attract new consumers to continue funneling them (and the money they put into the FTX system) as part of an elaborate scheme to prompt up the businesses.” 

The case is Sunil Kavuri, et al., v. Sam Bankman-Fried, et al., 1:22-cv-23817 (S.D. Fla.)

The founder of the world’s largest cryptocurrency exchange Binance CEO Changpeng Zhao has called for more regulatory clarity after a week of crypto market chaos and a year in which investors are estimated to have lost $2 trillion. “We do need to increase the clarity of regulation and the sophistication of regulation in the crypto space,” Zhao said to a gathering of G20 leaders at a summit in Bali. But it is not only regulators that bear responsibility for protecting people, the industry should also look at new models that could help.

The recent collapse of FTX – which filed for bankruptcy protection in the U.S. on November 11, but was valued at $32 billion earlier this year – has had significant repercussions for the entire cryptocurrency industry. Even the most established digital currency, Bitcoin, hit a two-year low following the FTX woes.

Cryptocurrencies allow traders or investors to buy and sell without the need for banks and brokerages. Blockchain technology enables peer-to-peer cryptocurrency transactions to happen on exchanges such as FTX and its rival Binance without these middlemen. Instead, transactions are authenticated through consensus by a group of validators, typically called miners. Miners solve complex mathematical puzzles to do this, otherwise known as the proof of work system used by Bitcoin and most cryptocurrencies. But when it comes to organizing these transactions, Binance and its peers use the same “limit order book” model as any traditional exchange such the New York Stock Exchange. This means there is a centralized structure that matches buyers and sellers, with market makers supplying liquidity and charging traders for transactions.

This kind of structure has exacerbated recent events in the crypto space to some extent. FTX’s centralized model allowed it to make loans to distressed crypto firms earlier this year. It also used exchange-issued tokens (FTT) to round out its sister company’s books. This increases the risk of exposure to a market collapse. But an emerging model, decentralized exchanges, operates under different rules for pricing cryptocurrencies and for governance that could reduce such risks. They allow investors to buy and sell tokens at an algorithmically determined price. This automated model does not rely on professional market makers, instead individual investors supply liquidity and collect a portion of fees from trades.

A Different Crypto Exchange Model

Like many decentralized exchanges, Uniswap, which launched in 2018, has a governance token called UNI that individual users of the exchange can use to cast votes in decisions about how the exchange operates. In principle, no centralized entity can manipulate system decisions voted through by owners of these coins. This helps the users of the exchange to retain control over what’s happening with their funds. Estimates suggest that up to 49,000 addresses on the Ethereum blockchain hold UNI tokens and 60 percent of tokens are held by investors.

Another issue that plagued FTX in its final days was that it is custodial, which means it had the right to suspend withdrawals of cryptocurrency by investors. FTX’s decision to ban withdrawals by investors meant many people have been refused access to money they used to trade on the exchange. Decentralized exchanges are non-custodial, so they allow individual investors full access to their crypto wallet balances and they can withdraw or deposit liquidity or stop trading at any time with no risk of their assets being frozen by the exchange.

One downside of decentralized exchanges versus centralized models such as FTX and Binance, however, is that they don’t allow traders to exchange fiat (traditional currencies issued by governments or countries) for crypto – they can only trade different cryptocurrencies on the exchange. The size of any trade will depend on the size of the liquidity pool, so if the latter is too small, a trader could find it difficult to make their desired transaction happen. Which type of exchange is likely dominate crypto trading in the future depends on several factors.

As some customers have withdrawn their crypto deposits from FTX over the past week, approximately 60 percent of the outflows reportedly went to FTX rival Binance. In the short term, the outflows of investors from FTX to Binance will increase its market share of crypto trading. This additional liquidity on Binance will help it to continue to dominate because it will be able to offer lower transaction costs. But when activity is concentrated in fewer exchanges, more customers are exposed to the risk of any individual crypto provider or large trader failing. And the industry is only becoming more concentrated following recent market failures. Greater concentration means greater risk of contagion.

And over time, decentralized exchanges will be able to become more competitive and lower their transaction costs too. This is in part due to the development of “scaling solutions” – protocols (or sets of rules) that increase activity and transaction speeds without affecting decentralization. This will also help to bring down the amount investors must pay to validate their transactions on the blockchain, making it less costly to trade.

New Rules for Crypto

And while traditional financial markets are heavily regulated, crypto is not, something that looks likely to change following FTX’s recent difficulties, as well as the events of this year. The importance of developing more official structures for the cryptocurrency market has become even more apparent. Regulators have already started to investigate FTX lending products and management of customer funds after its collapse. But what else can they do?

1. Closer monitoring of crypto assets

As Binance’s CEO has recently suggested on Twitter (above), one way to prevent a repeat of the FTX failure would be to monitor crypto exchange assets in real time rather than relying on annual reports with (in some cases) gross inaccuracies. This is already possible. An independent third party can provide “proof of reserves.” This means the organization publishes audit reports to provide an independent review of the balance sheet of an exchange, tracking the flows of money in and out of investors’ exchange wallets. This would flag up potential systemic failures due to unexpected activity, such as the use of exchange reserves to make loans to crypto firms, as described already with FTX.

2. Better crypto risk assessments

Financial regulators also need to adopt an appropriate risk assessment framework for cryptocurrencies. This should include independent audits and stress-testing of on-chain data (information about transactions on a blockchain network). Regulation could be imposed to restrict the use of an exchange’s tokens to make loans to crypto firms. More customer protection could also prevent exchanges from suspending withdrawals, leaving traders unable to access money held by an exchange that is in trouble.

Even amid the “crypto winter,” all may not lost for crypto. Appropriate regulation and new models could help the crypto industry to recover and strengthen, perhaps even encouraging further adoption of decentralized finance in mainstream financial markets.

Ganesh Viswanath-Natraj is an assistant professor at Warwick Business School at the University of Warwick. (This article was initially published by The Conversation.)

Nearly a dozen big-name celebrities have landed on the receiving end of a new class action lawsuit, accusing them of having  “promoted, assisted in,” or “actively participat[ing] in” the offer and sale of unregistered securities by way of failed crypto exchange, FTX, which filed for bankruptcy on November 11. In addition to naming FTX founder and former CEO Sam Bankman-Fried as a defendant in the case, Plaintiff Edwin Garrison claims that Tom Brady, Gisele Bundchen, Stephen Curry, Shaquille O’Neal, Udonis Haslem, David Ortiz, William Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Lawrence Gene David, and Kevin O’Leary, as well as the Golden State Warriors, are on the hook for engaging in deceptive and unfair trade practices and civil conspiracy, among other things. 

According to the newly filed lawsuit, which was lodged with a Florida federal court on Tuesday, Garrison claims that thanks to “false representations and deceptive conduct,” FTX carried out a “scheme designed to take advantage of unsophisticated investors from across the country,” causing consumers to “collectively sustain over $11 billion dollars in damages.” Part of the alleged fraud “employed by the FTX involved utilizing some of the biggest names in sports and entertainment—like [the named] defendants—to raise funds and drive American consumers to invest in [FTX’s] yield-bearing accounts” (“YBAs”).  

Specifically, Garrison alleges that the celebrity defendants acted as “brand ambassadors” for 3-year-old FTX, which rolled out large-scale branding and advertising projects, including a $20 million television-slash-social media campaign that debuted last year, starring Tom Brady and Bundchen, who “took equity stakes in FTX.” The other named defendants appeared in subsequent commercials, including a Super Bowl campaign featuring Larry David, and/or participated in social media promotions, with some, such as tennis star Naomi Osaka, being paid in “an equity stake in FTX and payments in unspecified amounts of cryptocurrency.” 

Importantly, Garrison claims that while the celebrity defendants disclosed their partnerships with FTX in connection with such advertisements, “They have never disclosed the nature, scope, and amount of compensation they personally received in exchange for the promotion of the deceptive FTX platform.” Garrison asserts that the the U.S. Securities and Exchange Commission (“SEC”) “has explained [that this is] a violation of the anti-touting provisions of the federal securities laws,” pointing to the SEC’s action against boxing champ Floyd Mayweather and music producer DJ Khaled over their crypto promotions, as well as prosecutions of other celebs, including Kim Kardashian and basketball player Paul Pierce, for failing to disclose their paid endorsements.

An FTX promo tweet
A since-deleted FTX promo tweet from Kevin O’Leary

(“The federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,” Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said in connection with the agency’s settlement with Kardashian in October. Kardashian allegedly failed to abide by 17(b) of the of the Securities Act, which “makes it unlawful for any person to promote a security without fully disclosing the receipt and amount of such consideration from an issuer.”)

Garrison also cites the Eleventh Circuit’s decision in Wildes v. Bitconnect Int’l PLC as a basis for naming the celebrity endorsers as defendants alongside Bankman-Fried; in that case, the federal appeals court held that “promoters of cryptocurrency through online videos could be liable for soliciting the purchase of unregistered securities through mass communication, and no ‘personal solicitation’ was necessary for solicitation to be actionable.”

In addition to failing to disclose the full scope/nature of their compensation from FTX, Garrison asserts that “none of these defendants performed any due diligence prior to marketing these FTX products to the public,” thereby, making them liable for the damages he and other similarly situated individuals suffered as a result. As a result of the “misrepresentations and omissions made [by the celebrity defendants],” which were “broadcast around the country through the television and internet,” Garrison argues that they are liable to him and the other class members that acquired crypto accounts from FTX for “soliciting their purchases of the unregistered YBAs.” 

With the foregoing in mind, Garrison claims in the lawsuit that the FTX-promoting defendants ran afoul of the Florida Securities and Investor Protection Act, which makes it unlawful to sell or offer to sell unregistered securities, and the Florida Deceptive and Unfair Trade Practices Act. More than that, he alleges that the defendants engaged in civil conspiracy by making “numerous misrepresentations and omissions … about the deceptive FTX platform in order to induce confidence and to drive consumers to invest in what was ultimately a Ponzi scheme.” And still yet, Garrison sets out a declaratory judgment claim, asserting that “there is a justiciable controversy over whether the YBAs were sold illegally, and whether the defendants illegally solicited purchases from [him] and the class.” 

In addition to seeking certification of the class action complaint, which seems to easily meet the $5 million class action threshold, and looking to get the court to order “declaratory and/or injunctive relief stemming from the offer and sale of FTX’s … yield-bearing cryptocurrency accounts,” Garrison is aiming to “hold the defendants responsible for the many billions of dollars in damages they caused.” 

As for whether Garrison will be successful in pursing the celebrity plaintiffs (as distinct from Bankman-Fried) even under Florida’s investor-plaintiff friendly statutes, experts expect that it is unlikely. Full disclosure issues aside, at least some of Garrison’s success will depend on if and/or how he is able to show that the celebs engaged in deceptive practices (i.e., did they mislead reasonable consumers) and that he and other class members were “directly and proximately” harmed as a result of the celebrity defendants’ allegedly misleading promotions of the company.

THE BIG PICTURE when it comes to the rising number of crypto-related litigation, which continues to ensnare not only the companies and their directors, but famous endorsers, as well, is that “there can be little question that crypto companies – and their promoters – do not simply need to be attuned to anticipated new regulatory edicts and scrutiny,” according to Bilzin Sumberg’s Philip Stein. “They must also be wary of lawsuits alleging misrepresentations of value and overstatements of likely returns on investment.”

The case is Edwin Garrison v. Sam Bankman-Fried, et al., 1:22-cv-23753 (S.D. Fla.)